Announcing CPP: Optimizing AdWords Spend for Maximum Profit

So, you’re responsible for the marketing budget for an e-commerce site. You and all of your competitors are almost certainly allocating a portion of that budget to Google AdWords. Unless you are only selling a very small number of things on your site, you are probably bidding on hundreds, if not thousands, of keywords in an attempt to have your ads displayed on the first page of a google search. How do you decide just what portion of your precious marketing budget to spend on each of these keywords? In this article, we will review several techniques that you might use in increasing order of sophistication.

Optimize for Visits: “The Old Days”

In “the old days,” many sites focused on increasing internet traffic to their site. For some sites, this is still a perfectly valid measure of success. However, for e-commerce sites, while increased traffic usually translates into more sales, it is not always optimal. For example, suppose you are running a speciality site selling running shoes and apparel. If you spend your AdWords budget on keywords like “tennis shoes” or “walking shoes,” you may increase visits to your site, but the conversion rate on those keywords may be very low. Your AdWords budget would probably be better spent by focusing on more relevant keywords.

Optimize for Orders: Cost Per Acquisition (CPA)

You’ve decided that you no longer want to spend your AdWords budget based purely on the amount of traffic it drives. Instead, you’d like to focus your AdWords spending on keywords that actually result in orders placed on your website. You decide that you’re willing to pay Google 5 dollars for every order placed. In other words, your cost per acquisition, or CPA, is 5 dollars. For better or worse, AdWords customers pay Google for clicks, not orders placed. That means that you will need to somehow determine what you should bid for each click. You will need to do this for each of the keywords you are managing, and you will have to continue to do this periodically as the optimal bid will change over time. If that seems like a lot of work, then you’re right. Finch can manage all of this for you automatically.

CPA might be the perfect way to manage an AdWords budget for some kinds of sites, but you have an e-commerce site with many products. You previously determined that you’d be willing to pay Google $5 for each order placed on your site. That might be reasonable for an order for a pair of $100 running shoes. However, would you still be willing to pay $5 for an order for a pair of $5 running socks? Probably not. The fundamental problem is that CPA assigns the same value to each order. We can do better.

Optimize for Revenue: Cost Per Value (CPV)

You’ve decided that CPA is better than just optimizing for visits, but since the orders placed on your site have a wide range of values, you’d like to increase your AdWords bids for keywords resulting in orders that are more valuable to you, and decrease your bids on less valuable keywords. One good way to do this is to decide how much you are willing to spend on AdWords for each dollar spent on your site. For example, you may decide that you are willing to pay Google 5 cents for every dollar spent on your site. In other words, your “cost per value,” or CPV, is 5 cents of AdWords spend for each dollar of revenue earned. Using CPV, for an order of a $100 pair of running shoes, you would be willing to pay Google $5 for clicks on your ads. Likewise, for a $5 pair of socks, CPV would only have you pay $0.25. This is a huge improvement over the CPA model which had you spending $5 per order, regardless of the value of the order. Calculating the correct AdWords bids to achieve the desired CPV for each of the hundreds or thousands of keywords used by a typical e-commerce site is very time consuming. It can’t be done just once -- bids must change in response to changes in the AdWords marketplace, and new bids must be computed as keywords are added. Finch provides a service that does just this.

Optimize for Profit: Cost Per Profit (CPP)

CPV is a very effective way to optimize your AdWords spending. However, CPV optimizes AdWords bids in an attempt to maximize revenue. It doesn’t take an MBA to know that businesses generally want to maximize profits, not revenue. For an e-commerce site in which the percentage of profit generated for the sale of any item is fairly constant, then CPV will work well for maximizing profits. However, if the percentage of profit generated by different products varies widely, then CPV may not be optimal.

Suppose your running shoe e-commerce site sells shoes of model A for $100 and makes $30 profit for each sale. You also sell shoes of model B for $100 and make $10 profit for each sale. The CPV model considers the sales of model A and model B to be equivalent since they both generate $100 in revenue. However, you’d really probably be willing pay Google more for each sale of model A than you would for model B.

Finch is excited to announce the early access release of a new feature that allows our customers to optimize their AdWords bids for profit. We’re calling optimizing this way “cost-per-profit” or “CPP.” It works much the same way as CPV does. Instead of setting a CPV target, you set a CPP target. For example, for your running shoe site, you might decide that you’re willing to spend 30 cents for every dollar of profit your site generates. Once you set this target, the Finch engine does the hard work of determining what to bid on each of your keywords in order to achieve this CPP target and updates your bids on a daily basis in response to the constantly changing AdWords marketplace.

Returning to our running shoe e-commerce site example, when using CPV with a target of 5 cents of Adwords spend for every dollar of revenue generated, this means that you are willing to spend up to $5 for each sale of model A and model B shoes since they each sell for $100 each. However, if you switch to CPP with a target of 30 cents of AdWords spend for each dollar of profit, then you’re telling the Finch engine that you’re willing to spend $9 for each sale of model A, but only $3 for each sale of model B. With CPP, the Finch engine is able to optimize profits. It will be more aggressive when setting bids for keywords that lead to sales of model A and less aggressive when setting bids for keywords that lead to sales of model B; even choosing not to bid on keywords that it sees are simply not profitable (but might have been viewed by the Finch engine as profitable when using CPV).

CPV is still a very good choice for many e-commerce sites. One of the big things that CPV has going for it is that it is very simple to implement with Finch. All you have to do is:

Implement AdWords conversion tracking on your site.

Grant Finch access to your AdWords account.

Set a CPV target for your site.

That’s really all there is to it. You can literally be up in running with a few minutes of effort on your part. CPP, on the other hand, takes a little more work. For CPP, you must:

Install the Google Analytics tracking code across your entire site.

Implement Google Analytics conversion tracking.

Grant Finch access to your AdWords and Google Analytics accounts.

Set a CPP target for your site.

Send a daily xml feed containing a set of order IDs for the orders processed that day and the profit value that Finch should assign to each of these orders.

Many sites have already implemented Google Analytics these days, so there may not be any extra work there. However, there will be a bit of development work required to generate and send the daily CPP xml feed to Finch. Because of this, many sites may want to start with Finch using the CPV model. This nearly always results in very significant increases in revenue and/or decreases in AdWords spend. Once this is up and running, and you have a site you feel could benefit from CPP optimization, then you may consider implementing the CPP xml feed and switching to CPP.

Many people wonder why the xml feed is necessary for CPP and not for CPV. The answer is that AdWords and Google Analytics already allow Google to track the revenue for each order, and that’s why starting with CPV is so easy with Finch. Couldn’t a site just insert the profit of an order in the AdWords or Google Analytics tracking code instead of revenue so that CPV just becomes CPP? That would, in fact, work. However, there are a number of problems with this:

If you expect to use AdWords reporting or Google Analytics reports for tracking revenue, those reports will now be reporting profit instead of revenue which might not be what you want.

If you decide you would like to switch from CPP to CPV, then that is not immediately possible since the data available in AdWords is profit, not revenue.

The value of the order tracked by AdWords and Google Analytics is included in the html of the page where the conversion tracking javascript code is included. This is fine when the value is revenue since revenue is simply what customers are paying for an order, and they are obviously already very aware of this value. However, if revenue is replaced by profit, then you’re bound to eventually get a customer who figures this out, sees how much profit you’re making for each order you’re placing, and blogs about his finding for the whole world to see. Most e-commerce sites prefer not to let their customers know how much profit they are generating from them. By sending the profit data in a separate xml feed, profit values remain hidden from your customers.

Many e-commerce sites don’t track profit within their e-commerce systems. Profit values may need to come from a separate accounting system and may not be readily available when an order is placed online. By sending the profit feed separately from when an order is placed through the e-commerce system, the e-commerce system doesn’t need to be modified or have access to a backend accounting system.

Finch is very excited to be launching this new CPP option. Our Early Access Program for this feature is now open for existing Finch customers. We intend to limit the number of Early Access Program participants before a public release later this year. If you are currently using CPV and feel like your site could benefit from CPP, please contact your Finch representative for more details on how to register for the Early Access Program.